Andorra is a microstate in Europe, located on the Iberian Peninsula, in the east of Pyrenees Mountains. Officially the Principality of Andorra, it covers an area of 181 square miles and has a population of 77,281, ranking as the 6th and 16th smallest country by area in Europe and the world respectively, and the world's 11th least populous. Andorra la Vella is the capital city of Andorra and is the highest city in Europe, located at an elevation of 3,356 feet above sea level. Catalan is the country's official language, although other languages such as Portuguese, Spanish, and French are commonly spoken in Andorra. With approximately 10.2 million visitors each year, tourism is the backbone of the country’s economy, as it accounts for about 80% of Andorra's gross domestic product (GDP).
The Rise of Andorra’s Economy
Given its isolation in the Pyrenees Mountains, small population, limited resources, and lack of proximity to major trade routes, Andorra's economy has historically been small. However, Andorra experienced rapid development in the latter half of the twentieth century due to its growing tourism industry and the state's status as a duty-free zone. Both factors contributed to the growth of the nation's retail sector, which is popular among visitors from Spain and France. The tourist and retail industries also attracted many immigrant workers from Portugal, France, and Spain, which in turn contributed to a rapid increase in Andorra's population. As a result of this growth, the country was challenged with controlling rapid urban development. For example, some local governments now limit the number of new buildings allowed to be constructed. While Andorra is not a member of the European Union (EU), it enjoys a unique relationship with the EU, in which it is treated as a member when dealing with manufactured goods but not agricultural produce. Following the implementation of the Single European Market in the 1990s, the state lost its duty-free status, although retail items remain less expensive in Andorra compared to neighboring countries. Andorra has 167 miles of roads, of which 123 miles are paved, and has no railroads or airports due to its terrain. In fact, the nearest international airport is located about 112 miles away in France.
Andorra’s natural resources are relatively limited but include potential hydroelectric-power, mineral water, lead, timber, iron ore, and hot springs, which have resulted in the creation some of Europe's biggest health spa resorts. Due to its mountainous landscape, farming is limited. In fact, only 2% of land in Andorra is suitable for farming. Nevertheless, the cultivation of cereals such as barley, wheat, rye, and oats, as well as the rearing of cattle and sheep, occurs in the Valira Valley. Rivers in the country provide irrigation water for small vegetable and tobacco fields, and most farmland is used for hay production. Tobacco is the most lucrative crop, and it occupies 8% of the total farmland. Varieties of tobacco cultivated include Andorran tobacco and eastern tobacco. The country has an estimated 1,100 cattle and 9,000 sheep, and meat production has experienced a slight increase in recent years. The majority of Andorra's food must be imported in order to meet local demand.
Andorra's primary manufactured goods include furniture, cigarettes, and cigars for export. Cigarettes are much cheaper in Andorra than in France or Spain due to the nation's status as a tax haven. As a result, the smuggling of cigarettes out of the country has become a significant challenge, especially during the 1990s, as smuggled cigarettes accounted for 15% of all cigarettes in Spain. The issue resulted in intense political and diplomatic pressures on the Andorran government by the EU and member states. Consequently, the proportion of contraband cigarettes in the Spanish market dropped to 12% in 1997 and 5% by 1999. Other measures introduced to reduce smuggling included sealing the Andorran border and introducing patrols on the hills and valleys.
Services, Trade and Tourism
The services sector is the largest component of Andorra's economy. In particular, tourism accounts for more than 80% of GDP. Visitors, especially from Spain and France, flock to the nation year-round to shop for goods such as watches, cigarettes, electronic goods, and jewelry. Tourists also visit the country during the winter to ski at various resorts such as Soldeu. Other tourist attractions include the small glacial lakes that dot Andorra's mountain landscape. The largest glacial lake is Lake Juclar, which covers an area of 28 hectares and attracts thousands of tourists who want to experience its unspoiled nature. The country receives more than 10 million foreign visitors each year, which is the highest tourist per capita ratio in the world. Additionally, Andorra contains 270 hotels and 400 restaurants that employ a significant portion of its labor force. The country is also a center for financial and banking services due to its status as a tax haven. Andorra imports most of its consumer goods, especially from Spain and France. For example, in 2006, 53% of imported goods came from Spain while 21% came from France. The total value of goods imported that year was estimated at $1.9 billion, while Andorra exported services and goods valued at $ 148.7 million. Spain is the country's biggest export market, accounting for 60% of Andorra's exports in 2006, while 17% of exports went to France.
Andorra's economic growth rate has historically been difficult to predict. However, in recent years Andorra has experienced a steady growth rate, which was estimated at 3.5% in 2005. The country's fiscal position has also improved considerably, as its rating by Standard & Poor's increased from "AA-" to "AA." The Andorran government is attempting to further integrate with the European Union in order to continue its economic stability and growth. Incentives introduced in hopes of boosting the economy include financial support for entities that establish tourist facilities within the country. Andorran banks also attract a significant number of foreign investors and depositors due to the country's lenient tax regime and bank secrecy laws.